By Jim T. Ryan,
November 2, 2012 at 11:00 AM
- Last modified: November 12, 2012 at 9:31 AM

King coal is still an important fuel source in power generation, representing the largest share of the PJM energy market, which includes Pennsylvania, at 47 percent last year.

But as its dominance slides some and is replaced by the growing natural-gas sector in power generation, there could be some spinoff into the railroad industry, where coal is one of the largest commodities carried.

On the one side, large railroads, including Virginia-based Norfolk Southern Corp. and Florida-based CSX Corp., are seeing a steady decline in the amount of coal they’re shipping overall and large drops in what they ship to power generators.

On the other side of the coin, U.S. coal could grow in importance as an export to emerging economies such as India and China to sustain their power needs. And some railroads are shipping more products and commodities for use in natural-gas exploration.

Companies and trade groups agree there’s a real shift taking place in the energy markets, but how much of an impact that has on the railroads is still up for debate.

Due to the abundance of natural gas and its subsequent low prices, the commodity’s power generation output for the first six months of 2012 grew 58 percent from the same period last year, according to EPGA. Meanwhile, coal-fired power generation declined about 10 percent in the same time.

Add to that stricter regulations from the U.S. Environmental Protection Agency, the growth of demand response and other conservation initiatives, and coal is losing steam next to natural gas, Smeltz said.

That means the cost to build gas power plants is lower than that of coal, he said.

“The economics of building a gas plant today are much better,” he said.

Declining coal power generation has been significant enough to impact railroad revenues and is commonly mentioned as an important risk factor for future business in annual reports.

Norfolk Southern — which has a significant presence in much of Pennsylvania, including the midstate — reported an 11-million-ton, or 18 percent, decline in coal deliveries to power generators in the first six months of 2012 compared with a year ago, according to its second quarter filing with the U.S. Securities and Exchange Commission. The company said the decline reflected competition from natural gas in power generation.

Total coal revenue decreased $188 million, or 11 percent, in the first six months, according to Norfolk Southern.

“Coal revenues for the remainder of the year are expected to decrease compared to last year due to lower average revenue per unit and lower traffic volumes,” the company wrote in its quarterly filing.

Norfolk Southern operates multiple rail yards in the midstate. It is expanding its Harrisburg and Rutherford rail yards in Dauphin County to make room for increasing intermodal traffic.

CSX operates in most states around our region and has a rail line moving through York County. It, too, is watching coal markets closely and has lamented the declined coal business in its 2011 year-end report.

“Furthermore, sustained low natural gas prices are having a negative impact on domestic coal volume, as coal-fired electricity generation is being displaced by natural gas-fired generation, which could adversely impact the company’s financial condition, results of operations or liquidity,” CSX said in the filing.

In the first half of the year, CSX had a 14 percent decline in coal units shipped and a 10 percent decline in coal revenue, according to the company.

It’s slightly ironic that coal historically helped the railroads survive over the decades by being such a reliable commodity, but today that business appears to be threatened on one level, said Joseph H. Gerdes III, executive director of Harrisburg-based Keystone State Railroad Association. The group represents interests of large and small railroads in the state.

“(Energy changes are) a huge impact on our industry,” he said.

However, there could be a saving grace for railroads in the energy markets, Gerdes said. As the gas markets grow, railroads will be doing more work to support those, he said.

A Norfolk Southern representative outlined similar dynamics at Shale Gas Insight, the Pennsylvania confab for the Marcellus Shale gas industry.

About 30 percent of the railroad’s carloads go to northern Pennsylvania from Harrisburg to Williamsport and last year the company shipped 45,000 Marcellus-related carloads, Rob Robinson, Norfolk Southern’s assistant vice president of shortline marketing and commercial development, said at the gas convention in Philadelphia in September.

The company saw 294 percent growth in Marcellus-related activity in 2010 and 97 percent in 2011, he said. It projects 22 percent growth this year.

Even if the balance of gas-related activity wouldn’t make up entirely for lost coal shipments, railroads are still shipping coal for export and to domestic steel manufacturers.

China and India are rapidly expanding their coal plants, Gerdes said. With the Panama Canal improvements under way and the dredging of the Philadelphia port, more coal could be shipped abroad, he said.

Norfolk Southern itself had a 7 percent increase in second quarter coal exports, but a 1 percent decline for the half year, according to its filings. Tonnage shipped to domestic metallurgical factories was up 11 percent in the first six months.

The overall outcome for railroads is uncertain, but their markets are changing with energy.

“There’s an upstream and downstream supply line in every industry,” Smeltz said. “Every part of that will be affected by the changes in the energy industry.”